Rio Tinto (
RIO
) seems to be sticking to its declared strategy of getting rid of
businesses where it doesn't see long-term growth potential or
scalability. It earlier hived off some assets belonging to its
aluminum business into a separate entity with the intention of
selling it. The company's diamond business has also been on the
block for months now. However, Rio Tinto has reached a binding
agreement to sell its 57.7% effective interest in Palabora Mining
Company for $373 million. Along with Rio, Anglo American has also
entered into a binding agreement to sell its 16.8% stake in
Palabora for $103 million. The sale is subject to various
government and regulatory approvals which are expected to take 4-6
months to come through.
Palabora Mining Company's assets include a large copper
mine, a smelter and a refinery complex in the Limpopo Province of
South Africa. It is South Africa's only producer of refined copper
and produces about 80,000 tonnes of refined copper per year,
supplying most of South Africa's copper needs and exporting the
balance.
See Full Analysis for Rio Tinto Here
Why Does The Asset Not Fit Rio's Strategy?
Palabora didn't have the scale to fit Rio's investment
strategies. It is expected to run out of copper in early 2016. Even
though studies were under way to extend its life, Rio may have
thought that investing scarce capital into a depleting asset didn't
make sense.
There is a lot of unprocessed magnetite stockpile on the site.
Magnetite is an iron ore product which is processed and used in
steel manufacturing. Neither Rio nor Anglo American were interested
in doing the same. Rio reasons that this activity falls outside its
core strategic focus areas. Rio also said the mine needs a new
owner who can develop the existing copper and vermiculite
operations.
What Are The Implications For Rio?
As far as earnings are concerned, in short, practically
none.
Looking at Rio Tinto's copper portfolio, it's not difficult to
see that the Palabora asset doesn't contribute much to its profits.
According to the company's financial results for the first half of
2012, the Palabora asset contributed $27 million to the total net
profit of $556 million from the copper business. The majority of
profits were derived from much larger operations at Rio's Kennecott
Utah and Escondida copper mines.
The copper business itself is a small part of Rio's overall
portfolio as evident from the overall underlying earnings figure of
$7.7 billion for the first half of 2012. The contribution from
Palabora doesn't seem to be much more than a rounding error.
The significance of the sale lies not so much in the sale itself
as in the insight it may provide into the management's thinking at
Rio. After Palabora, we think even the Northparkes copper and gold
mine in Australia could be a good candidate for divestiture. The
mine contributed $65 million in profits in the first half of 2012.
It is thus a small operation and expected to be economically viable
till around 2015. The resource may thus not have long-term growth
potential. Rio holds an 80% stake in the asset.
We have a
Trefis price estimate for Rio of $45
which is nearly 15% below its market price.
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